The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50% on the 3rd of March 2020. The reduction in the OPR is intended...

The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the

Overnight Policy Rate (OPR) by 25 basis points to 2.50% on the 3rd of March 2020.

The reduction in the OPR is intended to provide a more accommodative monetary environment to

support the projected improvement in economic growth amid price stability. BNM will continue

to monitor and assess the balance of risks surrounding the outlook for domestic growth and

inflation. The reduction in the OPR came largely in line with economists’ expectations. This is the

second cut so far this year. In January, Bank Negara reduced the OPR by 25 basis points to 2.75%

-- the lowest since 2011.

Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face

value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually.

Two years ago, the market yield-to-maturity was 3% pa.

Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a.

a) Determine the market price of the bonds at issue based on an appropriate model.

b) Based on the yield-to-maturity today, assess whether the price has changed and proceed to

determine its market price today.

c) Compare the results in (a) and (b) above and interpret the sensitivity of bond prices to

maturity and yield to maturity.